The international community has made the fight against money laundering and terrorist financing a priority. The IMF is especially concerned about the possible consequences of money laundering and the financing of terrorism on our members’ economies and on international financial stability.

The IMF’s Legal Department has the lead on the Fund’s work in combating money laundering and the financing of terrorism, and our work includes assessments of countries’ compliance with the international standard on anti-money laundering and combating the financing of terrorism (AML/CFT), technical assistance, research, and policy development.

Investors in pyramid scheme company VEFA speak to official in Tirana, Albania, in 1998 (photo: AFP)

Building on the results of our recent work on the risks from money laundering and the macroeconomic impacts of money laundering and predicate crime, we are seeking to integrate AML/CFT more fully into the Fund’s surveillance and Financial Sector Assessment Programs (FSAPs).

Classical risk theory

The main idea we have been developing is that the risk and the economic impactsof money laundering cannot be understood separately from money-generating criminal activity. Classical risk theory holds that risk is a function of threat, vulnerability, and consequence. As far as money-laundering risk is concerned, we think the volume of money laundering is driven first by the amount of profit-generating crime, and second, by the size and nature of the channels that launderers can use.

We think the macroeconomic impact is potentially highest in countries where

Criminal activities occur on a large-enough scale to adversely affect the economy (for example, Eastern European pyramid schemes in the mid-1990s or kleptocratic regimes that weaken government finances) or a macroeconomically significant sector (for example, financial sector frauds that cause runs on banks);

Transactions in illegal markets are responsible for a high percentage of measured output (for example, an economy driven in large part by narcotics production and trafficking), or

Weak AML/CFT regimes jeopardize a country’s access to global financial markets due to countermeasures and sanctions (as can happen when the Financial Action Task Force (FATF) issues a public statement on a country’s lack of compliance with international AML/CFT standards).

Such circumstances are frequently correlated with general weaknesses of governance, transparency, and oversight. Of course, macroeconomic impacts can be experienced in the member country, but because money laundering is an international phenomenon, its macroeconomic impact can also manifest itself as an externality for other members.

Financial frauds

The criminal activities that most commonly generate significant sums for laundering are large-scale financial frauds (for example, the Enron, Parmalat, and Madoff scandals), corruption (such as the regimes of the Philippines’ President Marcos and Zaire’s President Mobutu), tax evasion, and narcotics production and trafficking.

It seems to us beyond dispute that these large-scale criminal activities—though difficult to measure—can and do significantly influence the external stability of some Fund members. To the extent that these phenomena have the potential to influence—or actually do influence—stability, it makes sense for the Fund to include AML/CFT more formally in its regular surveillance work.

Similarly, analysis of money laundering risk should inform the prioritization, depth, and frequency of AML/CFT compliance assessments in FSAPs, especially in light of the response of the Group of Twenty (G-20) to the financial crisis, which includes proposals to enhance controls on money laundering and terrorist financing without a corresponding increase in resources.

Improving understanding

Of course, we realize that economic analysis of money laundering is a difficult and sensitive area. But we believe that we can help improve understanding of illegal underground and criminal markets, and that this will help us assess and design effective AML/CFT frameworks. As we develop an analytical framework for understanding risk from money laundering, we are testing it with colleagues who specialize in AML/CFT, as well as with economists working on more traditional concerns of the Fund.

Authorities from countries in South America, Asia, the Middle East, and Africa have expressed interest in continuing to work with us in this direction. We hope that this kind of collaboration will help generate better statistics, and ultimately improve collective understanding of aspects of the economies of Fund members that may have escaped scrutiny through traditional macroeconomic analysis.

Jody Myers is Assistant General Counsel in the IMF’s Legal Department.

So many organisations and individuals seem to see money laundering as an isolated phenomenom and many countrys’ responses reflect that mindset. The placement of Financial Intelligence Units in agencies with no law enforcement connection or mandate is one example and the isolation of investigative units (and consequently the information they possess) from traditional law enforcement bodies is another. It is refreshing to see an organisation like the IMF publicly make the connection between dirty money and its source.

The weaknes of the AML\TF initiative is not due to placement of Financial Intelligence Units in agencies with no law enforcement connection or mandat nor is the isolation of investigative units (and consequently the information they possess) from traditional law enforcement bodies.

Based on my decade of work in an administrative FIU and my international experience I feel that although FATF – IMF – UN – World Bank – EU have enforced the creation of FIUs – they failed to change the political \ financial “culture” of many countries – An administrative FIU can pave a way to the minds and hearts of the Law Enforcement intel and investigation units – furthermore there is no democracy which has merged its Taxation Auhtorities with Police or internal security – the fusion ofintelligence can be and is acheived IF A GOVERNMENT is keen on AML \ TF policy implementation.

The problem lies in FIU which is created as a “make believe” to comply with the UN standards and is collecting and dissaminating futile Intel Reports and pretends to “cooperate” with other Egmont Group members – yet it is seldom exposed.

IMF and FATF as well as MONEYVAL (EU) and others should have the powers and resources to evaluate FIU effectiveness, its analytical tools, the effectiveness of its reporting enforcement on the financial sector and peripheral economical services. This should be accompanied with sanctions (Financial Trade etc.) against such countries which did not achieve or deviated from reasobanle implementation of their AML \ TF duties.